No amount of corporate restructuring will fix fundamentals
Washington Mutual announced today that Kerry Killinger will no longer serve dual role as chairman of the board and also as CEO. He will instead become a regular board member and retain his title as Chief Executive. The problem isn’t in the executive lineup or in the restructuring of “corporate governance” these loan companies are just trying to avoid pressure from average Joe investor and his opinion on subprime investments.
The problem that surrounds big banking isn’t corporate structuring nor the internal workings of the banks, its their inability to gauge risks and properly allocate their investments. The bets that these large bankers placed in the last few years would be equal to that of your financial planner putting your retirement in penny stocks. We’ve seen in and out of history that the real estate bubble always bursts, and every time at the hands of subprime mortgage debt. The S&L blowups over the last 30 years were due entirely to too much credit and too many bad investments in faltering debt. In San Diego, its so hard to sell a home that one broker is now offering “Buy one get one free” deals where a million dollar home is paired with a much smaller home in an effort to strike a deal.
The resets that plagued today’s market aren’t over yet and while the market made it through the debt through 2007-2008, there are just as many home interest rate resets slated for 2009.
The Federal Reserve has a larger problem on its hands than it has expected. It needs to start ramping up interest rates in the fall to cut back on credit until it can unleash more rate cuts in 2009 to make up for resetting mortgages. We’ll watch it play out.